UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to__________________
Commission File Number: 0-19511
MORGAN STANLEY SPECTRUM SELECT L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3619290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management LLC
522 Fifth Avenue, 13th Floor
New York, NY 10036
(Address of principal executive offices) (Zip Code)
Registrant?s telephone number, including area code (212) 296-1999
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No___________
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (?232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes No___________
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of ?large accelerated filer?,
?accelerated filer? and ?smaller reporting company? in Rule 12b-2 of the
Exchange Act.
Large accelerated filer______ Accelerated filer______
Non-accelerated filer X Smaller reporting company_______
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2009
<caption>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<s> <c>
Statements of Financial Condition as of June 30, 2009
and December 31, 2008 . ..2
Statements of Operations for the Three and Six Months
Ended June 30, 2009 and 2008 3
Statements of Changes in Partners? Capital for the
Six Months Ended June 30, 2009 and 2008 . 4
Statements of Cash Flows for the Six Months Ended
June 30, 2009 and 2008 5
Condensed Schedules of Investments as of June 30, 2009
and December 31, 2008 .......................................6
Notes to Financial Statements 7-24
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations 25-39
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 39-52
Item 4. Controls and Procedures 52-53
Item 4T. Controls and Procedures 53
PART II. OTHER INFORMATION
Item 1A.Risk Factors 54
Item 6. Exhibits 54
</table>
<page> <table> PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<caption>
June 30, December 31,
2009 2008
$ $
ASSETS
<s> <c> <c>
Trading Equity:
Unrestricted cash 447,752,048 601,638,653
Restricted cash 31,278,476 8,756,170
Total cash 479,030,524 610,394,823
Net unrealized gain on open contracts (MS&Co.) 5,009,145 19,905,581
Net unrealized gain on open contracts (MSIP) 261,895 6,140,183
Total net unrealized gain on open contracts 5,271,040 26,045,764
Total Trading Equity 484,301,564 636,440,587
Interest receivable (MS&Co.) 30,827 4,300
Total Assets 484,332,391 636,444,887
LIABILITIES AND PARTNERS? CAPITAL
Liabilities
Redemptions payable 5,281,008 23,861,804
Accrued brokerage fees (MS&Co.) 2,493,755 3,093,914
Accrued management fees 949,976 1,175,736
Accrued incentive fee ? 2,429,055
Total Liabilities 8,724,739 30,560,509
Partners? Capital
Limited Partners (12,787,814.460 and
14,700,689.307 Units, respectively) 470,774,021 599,790,920
General Partner (131,297.769 and
149,348.769 Units, respectively) 4,833,631 6,093,458
Total Partners? Capital 475,607,652 605,884,378
Total Liabilities and Partners? Capital 484,332,391 636,444,887
NET ASSET VALUE PER UNIT 36.81 40.80
<fn>
The accompanying notes are an integral part
of these financial statements. </table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<caption>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2009 2008 2009 2008
$ $ $ $
<s> <c> <c> <c> <c>
INVESTMENT INCOME
Interest income (MS&Co.) 114,950 1,821,455 265,116 4,219,407
EXPENSES
Brokerage fees (MS&Co.) 7,561,371 8,525,711 16,262,823 16,723,687
Management fees 2,882,656 3,420,281 6,202,852 6,695,939
Incentive fees ? 4,825,589 391,898 10,541,832
Total Expenses 10,444,027 16,771,581 22,857,573 33,961,458
NET INVESTMENT LOSS (10,329,077) (14,950,126) (22,592,457) (29,742,051)
TRADING RESULTS
Trading profit (loss):
Realized (12,468,788) 42,370,166 (11,820,649) 123,952,059
Net change in unrealized 1,907,982 24,976,431 (20,774,724) 25,914,273
Total Trading Results (10,560,806) 67,346,597 (32,595,373) 149,866,332
NET INCOME (LOSS) (20,889,883) 52,396,471 (55,187,830) 120,124,281
NET INCOME (LOSS) ALLOCATION
Limited Partners (20,681,387) 51,821,916 (54,634,399) 118,808,376
General Partner (208,496) 574,555 (553,431) 1,315,905
NET INCOME (LOSS) PER UNIT
Limited Partners (1.59) 3.31 (4.03) 7.39
General Partner (1.59) 3.31 (4.03) 7.39
Units Units Units Units
WEIGHTED AVERAGE NUMBER
OF UNITS OUTSTANDING 13,176,734.469 15,883,717.225 13,707,552.782 16,170,648.846
<fn>
The accompanying notes are an integral part
of these financial statements. </table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Six Months Ended June 30, 2009 and 2008
(Unaudited)
<caption>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
<s> <c> <c> <c> <c>
Partners? Capital,
December 31, 2007 16,744,490.009 517,496,723 5,681,832 523,178,555
Offering of Units 680,255.731 24,472,286 ? 24,472,286
Net Income ? 118,808,376 1,315,905 120,124,281
Redemptions (1,865,566.537) (66,361,148) (296,829) (66,657,977)
Partners? Capital,
June 30, 2008 15,559,179.203 594,416,237 6,700,908 601,117,145
Partners? Capital,
December 31, 2008 14,850,038.076 599,790,920 6,093,458 605,884,378
Net Loss ? (54,634,399) (553,431) (55,187,830)
Redemptions (1,930,925.847) (74,382,500) (706,396) (75,088,896)
Partners? Capital,
June 30, 2009 12,919,112.229 470,774,021 4,833,631 475,607,652
<fn>
The accompanying notes are an integral part
of these financial statements. </table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<caption>
For the Six Months Ended June 30,
2009 2008
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<s> <c> <c>
Net income (loss) (55,187,830) 120,124,281
Noncash item included in net income (loss):
Net change in unrealized 20,774,724 (25,914,273)
(Increase) decrease in operating assets:
Restricted cash (22,522,306) 13,435,220
Interest receivable (MS&Co.) (26,527) 329,986
Net premiums paid for options purchased ? 68,716
Increase (decrease) in operating liabilities:
Accrued brokerage fees (MS&Co.) (600,159) 232,051
Accrued management fees (225,760) 99,125
Accured incentive fees (2,429,055) 4,286,783
Net cash provided by (used for) operating activities (60,216,913) 112,661,889
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received from offering of Units ? 21,610,482
Cash paid for redemptions of Units (93,669,692) (60,749,643)
Net cash used for financing activities (93,669,692) (39,139,161)
Net increase (decrease) in unrestricted cash (153,886,605) 73,522,728
Unrestricted cash at beginning of period 601,638,653 475,137,768
Unrestricted cash at end of period 447,752,048 548,660,496
<fn>
The accompanying notes are an integral part
of these financial statements. </table>
<page> <table> MORGAN STANLEY SPECTRUM SELECT L.P.
CONDENSED SCHEDULES OF INVESTMENTS
June 30, 2009 and December 31, 2008 (Unaudited)
<caption>
Futures and Forward Contracts
Long
Unrealized
Gain/(Loss)
Percentage of
Net Assets
Short
Unrealized
Gain/(Loss)
Percentage of
Net Assets
Net
Unrealized
Gain/(Loss)
$
%
$
%
$
June 30, 2009, Partnership Net Assets: $475,607,652
<s>
<c>
<c>
<c>
<c>
,c>
Commodity
2,173,666
0.46
558,736
0.12
2,732,402
Equity
374,804
0.08
(101,221)
(0.02)
273,583
Foreign currency
134,639
0.03
(492,661)
(0.11)
(358,022)
Interest rate
4,423,810
0.93
(724,724)
(0.15)
3,699,086
Grand Total:
7,106,919
1.50
(759,870)
(0.16)
6,347,049
Unrealized Currency Loss
(0.23)
(1,076,009)
Total Net Unrealized Gain on Open Contracts
5,271,040
December 31, 2008, Partnership Net Assets: $605,884,378
Commodity
838,755
0.14
11,613,498
1.92
12,452,253
Equity
145,512
0.02
(39,608)
(0.01)
105,904
Foreign currency
(318,118)
(0.05)
453,250
0.07
135,132
Interest rate
14,885,639
2.46
2,078
?
14,887,717
Grand Total:
15,551,788
2.57
12,029,218
1.98
27,581,006
Unrealized Currency Loss
(0.25)
(1,535,242)
Total Net Unrealized Gain on Open Contracts
26,045,764
<fn>
The accompanying notes are an integral part
of these financial statements. </table>
- - 6 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the financial condition and results of operations
of Morgan Stanley Spectrum Select L.P. (the ?Partnership?). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership?s December 31, 2008, Annual
Report on Form 10-K.
1. Organization
Morgan Stanley Spectrum Select L.P. is a Delaware limited
partnership organized in 1991 to engage primarily in the
speculative trading of futures contracts, options on futures and
forward contracts, and forward contracts on physical commodities
and other commodity interests, including, but not limited to,
foreign currencies, financial instruments, metals, energy, and
agricultural products (collectively, ?Futures Interests?) (refer
to Note 4. Financial Instruments). The Partnership is one of the
Morgan Stanley Spectrum series of funds, comprised of the
Partnership, Morgan Stanley Spectrum Currency L.P., Morgan
Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum
Strategic L.P., and Morgan Stanley Spectrum Technical L.P.
- 7 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(collectively, the ?Spectrum Series?).
The Partnership may buy or write put and call options through
listed exchanges and the over-the-counter market. The buyer of an
option has the right to purchase (in the case of a call option) or
sell (in the case of a put option) a specified quantity of a
specific Futures Interest or underlying asset at a specified price
prior to or on a specified expiration date. The writer of an
option is exposed to the risk of loss if the market price of the
Futures Interest or underlying asset declines (in the case of a
put option) or increases (in the case of a call option). The
writer of an option can never profit by more than the premium paid
by the buyer but can lose an unlimited amount.
Premiums received/premiums paid from writing/purchasing options
are recorded as liabilities/assets on the Statements of Financial
Condition and are subsequently adjusted to fair values. The
difference between the fair value of the option and the premiums
received/premiums paid is treated as an unrealized gain or loss.
The Partnership?s general partner is Demeter Management LLC
(?Demeter?). On April 30, 2009, Demeter Management Corporation
was converted from a Delaware corporation to a Delaware limited
- 8 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
liability company and changed its name to Demeter Management LLC.
The commodity brokers are Morgan Stanley & Co. Incorporated
(?MS&Co.?) and Morgan Stanley & Co. International plc (?MSIP?).
MS&Co. also acts as the counterparty on all trading of foreign
currency forward contracts. Morgan Stanley Capital Group Inc.
(?MSCG?) acts as the counterparty on all trading of options on
foreign currency forward contracts. MSIP serves as the commodity
broker for trades on the London Metal Exchange (?LME?). Demeter
is a wholly-owned subsidiary of Morgan Stanley Smith Barney
Holdings LLC, which in turn is majority owned by Morgan Stanley
and minority owned by Citigroup Inc. (?Citigroup?). MS&Co.,
MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley.
The trading advisors to the Partnership are EMC Capital
Management, Inc., Northfield Trading L.P., Rabar Market Research,
Inc., Sunrise Capital Management, Inc., Graham Capital
Management, L.P., and Altis Partners (Jersey) Limited (each
individually, a ?Trading Advisor?, or collectively, the ?Trading
Advisors?).
Demeter does not believe that the change in ownership of Demeter
had a material impact on the Partnership?s limited partners. At
all times Demeter served as the general partner of the Partnership
and it continues to do so. The change in ownership occurred
pursuant to the transaction in which Morgan Stanley and Citigroup
agreed to combine the Global Wealth Management Group of Morgan
- 9 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stanley and the Smith Barney division of Citigroup Global Markets
Inc. into a new joint venture. The transaction closed on June 1,
2009.
On May 28, 2009, the Board of Directors of Demeter, in accordance
with the provisions of Section 5 of the limited partnership
agreement for the Partnership, resolved to modify the net worth
requirement of Demeter. Demeter?s net worth requirement going
forward is 5% of the total partners? contributions, with a minimum
net worth of $50,000 and a maximum of $1,000,000 (cumulative for
all the limited partnerships for which Demeter acts as a general
partner, collectively the ?Funds?). Prior to the amendment,
Demeter?s net worth requirement was generally at least 10% of
total partners? contributions (cumulative for all the limited
partnerships for which Demeter acted as general partner), with a
minimum net worth of $50,000, but with no maximum. This change in
Demeter?s net worth requirement for the Funds does not affect the
limited partners? interests in the Funds, status as a limited
partner in the Funds, or the status of the Funds as partnerships
for tax purposes.
2. Related Party Transactions
The Partnership?s cash is on deposit with MS&Co. and MSIP in
futures, forward and options trading accounts to meet margin
requirements as needed. MS&Co. pays the Partnership at each month
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
end interest income on 80% of the funds on deposit with the
commodity brokers at a rate equal to the monthly average of the
4-week U.S. Treasury bill discount rate during such month. The
Partnership pays brokerage fees to MS&Co.
3. Income Taxes
No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible
for reporting income or loss based upon their respective share of
the Partnership?s revenues or expenses for income tax purposes.
The Partnership files U.S. federal and state tax returns.
Financial Accounting Standards Board (?FASB?) Interpretation No.
48, ?Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109? (?FIN 48?), clarifies
the accounting for uncertainty in income taxes recognized in a
Partnership's financial statements, and prescribes a recognition
threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected
to be taken. The 2005 through 2008 tax years generally remain
subject to examination by U.S. federal and most state tax
authorities.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Financial Instruments
The Partnership trades Futures Interests. Futures and forwards
represent contracts for delayed delivery of an instrument at a
specified date and price. Risk arises from changes in the value
of these contracts and the potential inability of counterparties
to perform under the terms of the contracts. There are numerous
factors which may significantly influence the fair value of these
contracts, including interest rate volatility.
The fair value of exchange-traded contracts is based on the
settlement price quoted by the exchange on the day with respect
to which fair value is being determined. If an exchange-traded
contract could not have been liquidated on such day due to the
operation of daily limits or other rules of the exchange, the
settlement price shall be the settlement price on the first
subsequent day on which the contract could be liquidated. The
fair value of off-exchange-traded contracts is based on the fair
value quoted by the counterparty.
The Partnership?s contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standards
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(?SFAS?) No. 133, ?Accounting for Derivative Instruments and
Hedging Activities? (?SFAS No. 133?). SFAS No. 133 defines a
derivative as a financial instrument or other contract that has
all three of the following characteristics:
1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in
market factors;
3) Terms require or permit net settlement.
Generally, derivatives include futures, forward, swaps or options
contracts, and other financial instruments with similar
characteristics such as caps, floors, and collars.
The net unrealized gains (losses) on open contracts, reported as a
component of ?Trading Equity? on the Statements of Financial
Condition, and their longest contract maturities were as follows:
<table> <caption>
Net Unrealized Gains/(Losses)
on Open Contracts Longest Maturities
Exchange- Off-Exchange- Exchange- Off-Exchange-
Date Traded Traded Total Traded Traded
$ $ $
<s> <c> <c> <c> <c> <c>
Jun. 30, 2009 6,536,720 (1,265,680) 5,271,040 Jun. 2011 Sep. 2009
Dec. 31, 2008 27,202,139 (1,156,375) 26,045,764 Jun. 2010 Mar. 2009
</table>
- - 13 -
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership has credit risk associated with counterparty non-
performance. As of the date of the financial statements, the
credit risk associated with the instruments in which the
Partnership trades is limited to the amounts reflected in the
Partnership?s Statements of Financial Condition.
The Partnership also has credit risk because MS&Co., MSIP, and/or
MSCG act as the futures commission merchants or the counter-
parties, with respect to most of the Partnership?s assets.
Exchange-traded futures, exchange-traded forward, and exchange-
traded futures-styled options contracts are marked to market on a
daily basis, with variations in value settled on a daily basis.
MS&Co. and MSIP, each acting as a commodity broker for the
Partnership?s exchange-traded futures, exchange-traded forward,
and exchange-traded futures-styled options contracts, are
required, pursuant to regulations of the Commodity Futures Trading
Commission (?CFTC?), to segregate from their own assets, and for
the sole benefit of their commodity customers, all funds held by
them with respect to exchange-traded futures, exchange-traded
forward, and exchange-traded futures-styled options contracts,
including an amount equal to the net unrealized gains (losses) on
all open exchange-traded futures, exchange-traded forward, and
exchange-traded futures-styled options contracts, which funds, in
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the aggregate, totaled $485,567,244 and $637,596,962 at June 30,
2009 and December 31, 2008, respectively. With respect to the
Partnership?s off-exchange-traded forward currency contracts and
forward currency options contracts, there are no daily
settlements of variation in value, nor is there any requirement
that an amount equal to the net unrealized gains (losses) on such
contracts be segregated. However, the Partnership is required to
meet margin requirements equal to the net unrealized loss on open
forward currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the
cash balance in a custody account held at MS&Co. With respect to
those off-exchange-traded forward currency contracts, the
Partnership is at risk to the ability of MS&Co., the sole
counterparty on all such contracts, to perform. With respect to
those off-exchange-traded forward currency options contracts, the
Partnership is at risk to the ability of MSCG, the sole
counterparty on all such contracts, to perform. The Partnership
has a netting agreement with each counterparty. These agreements,
which seek to reduce both the Partnership?s and the
counterparties? exposure on off-exchange-traded forward currency
contracts, including options on such contracts, should materially
decrease the Partnership?s credit risk in the event of MS&Co.?s or
MSCG?s bankruptcy or insolvency.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The futures, forwards and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities, factors that result in frequent
changes in the fair value of the Partnership?s open positions,
and consequently in its earnings, whether realized or unrealized,
and cash flow. Gains and losses on open positions of exchange-
traded futures, exchange-traded forward, and exchange-traded
futures-styled options contracts are settled daily through
variation margin. Gains and losses on off-exchange-traded
forward currency contracts are settled upon termination of the
contract. However, the Partnership is required to meet margin
requirements equal to the net unrealized loss on open forward
currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the
cash balance in a custody account held at MS&Co.
5. Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, ?Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133? (?SFAS No. 161?). SFAS No. 161 is
intended to improve financial reporting about derivative
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand how those
Instruments and activities are accounted for; how and why they are
used; and their effects on a Partnership?s financial position,
financial performance, and cash flows. SFAS No. 161 was effective
as of January 1, 2009, for the Partnership.
The Partnership?s objective is to profit from speculative trading
in Futures Interests. Therefore, the Trading Advisors for the
Partnership will take speculative positions in Futures Interests
where they feel the best profit opportunities exist for their
trading strategy. As such, the absolute quantity (the total of
the open long and open short positions) has been presented as a
part of the volume disclosure, as position direction is not an
indicative factor in such volume disclosures. In regards to
foreign currency forward trades, each notional quantity amount
has been converted to an equivalent contract based upon an
industry convention.
The following table summarizes the valuation of the Partnership?s
investments by the above SFAS No. 161 disclosure as of June 30,
2009 and reflects the contracts outstanding at such time.
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<table> <caption>
The Effect of Trading Activities on the Statements of Financial Condition as of June 30, 2009:
Futures and Forward Contracts
Long
Unrealized
Gain
Long
L Unrealized
Loss
Short
Unrealized
Gain
Short
Unrealized
Loss
Net
Unrealized
Gain/(Loss)
Total number
of outstanding
contracts
$
$
$
$
$
June 30, 2009
<s>
<c>
<c>
<c>
<c>
<c>
<c>
Tr Commodity
5,253,378
(3,079,712)
1,844,836
(1,286,100)
2,732,402
4,742
K Equity
754,132
(379,328)
8,504
(109,725)
273,583
1,814
K Foreign currency
1,508,853
(1,374,214)
218,565
(711,226)
(358,022)
6,435
K Interest rate
4,772,441
(348,631)
92,085
(816,809)
3,699,086
6,498
K Total
12,288,804
(5,181,885)
2,163,990
(2,923,860)
6,347,049
K Unrealized currency loss
(1,076,009)
K Total net unrealized gain
on open contracts
5,271,040
</table>
The following tables summarize the net trading results of the
Partnership during the three and six month periods as required by
SFAS No. 161.
<table>
The Effect of Trading Activities on the Statements of Operations for the Three and Six Months Ended June 30, 2009 included in
Total Trading Results:
<caption>
For the Three Months
For the Six Months
Ended June 30, 2009
Ended June 30, 2009
Type of Instrument
$
$
<s>
<c>
<c>
Commodity
1,913,301
(8,091,616)
K Equity
1,812,259
915,602
K Foreign currency
(2,539,364)
(11,199,226)
K Interest rate
(12,333,657)
(14,679,365)
K Unrealized currency gain
586,655
459,232
K Total
(10,560,806)
(32,595,373)
</table>
<page> <table>
Line Items on the Statements of Operations for the Three and Six Months Ended June 30, 2009:
<caption>
For the Three Months
For the Six Months
Ended June 30, 2009
Ended June 30, 2009
Trading Results
$
$
<s>
<c>
<c>
Realized
(12,468,788)
(11,820,649)
K Net change in unrealized
1,907,982
(20,774,724)
K Total Trading Results
(10,560,806)
(32,595,373)
</table>
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Fair Value Measurements
As defined by SFAS No. 157, ?Fair Value Measurements?, fair value
is the amount that would be recovered when an asset is sold or an
amount paid to transfer a liability, in an ordinary transaction
between market participants at the measurement date (exit price).
Market price observability is impacted by a number of factors,
including the types of investments, the characteristics specific
to the investment, and the state of the market (including the
existence and the transparency of transactions between market
participants). Investments with readily available actively
quoted prices in an ordinary market will generally have a higher
degree of market price observability and a lesser degree of
judgment used in measuring fair value.
SFAS No. 157 requires use of a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value into three levels: Level 1 ? unadjusted quoted market
prices in active markets for identical assets and liabilities;
Level 2 - inputs other than unadjusted quoted market prices that
are observable for the asset or liability, either directly or
indirectly (including quoted prices for similar investments,
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
interest rates, credit risk); and Level 3 - unobservable inputs
for the asset or liability (including the Partnership?s own
assumptions used in determining the fair value of investments).
In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases,
an investment?s level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value
measurement. The Partnership?s assessment of the significance of
a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the
investment.
The following tables summarize the valuation of the Partnership?s
investments by the above SFAS No. 157 fair value hierarchy as of
June 30, 2009 and December 31, 2008:
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<table> <caption>
June 30, 2009
Assets
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
<s>
<c>
<c>
<c>
<c>
Net unrealized gain (loss) on open
contracts
$6,536,720
$(1,265,680)
n/a
$5,271,040
</table>
<table> <caption>
December 31, 2008
Assets
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
<s>
<c>
<c>
<c>
<c>
Net unrealized gain (loss) on open
contracts
$
$ $27,202,139
$(1,156,375)
n/a
$26,045,764
</table>
7. Recent Accounting Pronouncements
(a) Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
In April 2009, the FASB issued FASB Staff Position (?FSP?) SFAS
No. 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly (?FSP SFAS No.
157-4?). FSP SFAS No. 157-4 provides additional guidance for
determining fair value and requires new disclosures regarding the
categories of fair value instruments, as well as the inputs and
valuation techniques utilized to determine fair value and any
changes to the inputs and valuation techniques during the period.
FSP SFAS No. 157-4 is effective for the quarter ended June 30,
2009. The adoption of FSP SFAS No. 157-4 did not have a material
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
impact on the Partnership?s financial statements.
(b) Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting
Principals Board (?APB?) No. 28-1, Interim Disclosures About Fair
Value of Financial Instruments (?FSP SFAS No. 107-1? and ?APB No.
28-1?). The staff position requires fair value disclosures of
financial instruments on a quarterly basis, as well as new
disclosures regarding the methodology and significant assumptions
underlying the fair value measures and any changes to the
methodology and assumptions during the reporting period. FSP
SFAS No. 107-1 and APB No. 28-1 are effective for the quarter
ended June 30, 2009. The adoption of FSP SFAS No. 107-1 and APB
No. 28-1 did not have a material impact on the Partnership?s
financial statements.
(c) Subsequent Events
In May 2009, the FASB issued SFAS No. 165, Subsequent Events
(?SFAS No. 165?). SFAS No. 165 establishes general standards of
accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
are available to be issued. It requires the disclosure of the
date through which an entity has evaluated subsequent events and
the basis for that date; that is, whether that date represents
the date the financial statements were issued or were available
to be issued. SFAS No. 165 is effective for the quarter ended
June 30, 2009. Management has performed its evaluation of
subsequent events through August 12, 2009, the date these
financial statements were issued.
(d) Accounting Standards Codification
On June 29, 2009, the FASB issued Statement No. 168, ?FASB
Accounting Standards Codification? and the Hierarchy of Generally
Accepted Accounting Principles ? a replacement of FASB Statement
No. 162. The FASB has stated that ?the FASB Accounting Standards
Codification? (?Codification?) will become the source of
authoritative U.S. Generally Accepted Accounting Principles
(?GAAP?) recognized by the FASB to be applied by nongovernmental
entities. Once effective, the Codification?s content will carry
the same level of authority, effectively superseding Statement No.
162. In other words, the GAAP hierarchy will be modified to
include only two levels of GAAP: authoritative and
nonauthoritative. Statement No. 168 is effective for financial
<page> MORGAN STANLEY SPECTRUM SELECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
statements issued for interim and annual periods ending after
September 15, 2009.
8. Restricted and Unrestricted Cash
As reflected on the Partnership?s Statements of Financial
Condition, restricted cash equals the cash portion of assets on
deposit to meet margin requirements plus the cash required to
offset unrealized losses on foreign currency forwards and options
and offset losses on offset LME positions. All of these amounts
are maintained separately. Cash that is not classified as
restricted cash is therefore classified as unrestricted cash.
<page> Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with MS&Co. and
MSIP as commodity brokers in separate futures, forward and options
trading accounts established for each Trading Advisor. Such
assets are used as margin to engage in trading and may be used as
margin solely for the Partnership?s trading. The assets are held
in either non-interest bearing bank accounts or in securities and
instruments permitted by the CFTC for investment of customer
segregated or secured funds. Since the Partnership?s sole purpose
is to trade in futures, forwards and options, it is expected that
the Partnership will continue to own such liquid assets for margin
purposes.
The Partnership?s investment in futures, forwards and options may,
from time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations referred
to as ?daily price fluctuations limits? or ?daily limits?. Trades
may not be executed at prices beyond the daily limit. If the
price for a particular futures or options contract has increased
or decreased by an amount equal to the daily limit, positions in
that futures or options contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
- - 25 -
<page> trading. These market conditions could prevent the
Partnership from promptly liquidating its futures or options
contracts and result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions. For the periods covered by
this report, illiquidity has not materially affected the
Partnership?s assets.
There are no known material trends, demands, commitments, events,
or uncertainties at the present time that are reasonably likely to
result in the Partnership?s liquidity increasing or decreasing in
any material way.
Capital Resources. The Partnership does not have, nor does it
expect to have, any capital assets. Redemptions of units of
limited partnership interest (?Unit(s)?) in the future will affect
the amount of funds available for investments in futures, forwards
and options in subsequent periods. It is not possible to
- - 26 -
<page> estimate the amount, and therefore the impact, of future
outflows of Units.
There are no known material trends, favorable or unfavorable,
that would affect, nor any expected material changes to the
Partnership?s capital resource arrangements at the present time.
Off-Balance Sheet Arrangements and Contractual Obligations. The
Partnership does not have any off-balance sheet arrangements, nor
does it have contractual obligations or commercial commitments to
make future payments that would affect its liquidity or capital
resources.
Results of Operations
General. The Partnership?s results depend on the Trading
Advisors and the ability of each Trading Advisor?s trading
program to take advantage of price movements in the futures,
forward and options markets. The following presents a summary of
the Partnership?s operations for the three and six month periods
ended June 30, 2009 and 2008, and a general discussion of its
trading activities during each period. It is important to note,
however, that the Trading Advisors trade in various markets at
different times and that prior activity in a particular market
does not mean that such market will be actively traded by the
Trading Advisors or will be profitable in the future.
Consequently, the results of operations of the Partnership are
difficult to discuss other than in the context of the Trading
<page> Advisors? trading activities on behalf of the Partnership
during the period in question. Past performance is no guarantee
of future results.
The Partnership?s results of operations set forth in the
financial statements on pages 2 through 24 of this report are
prepared in accordance with accounting principles generally
accepted in the United States of America, which require the use
of certain accounting policies that affect the amounts reported
in these financial statements, including the following: the
contracts the Partnership trades are accounted for on a trade-
date basis and marked to market on a daily basis. The difference
between their original contract value and market value is
recorded on the Statements of Operations as ?Net change in
unrealized trading profit (loss)? for open (unrealized)
contracts, and recorded as ?Realized trading profit (loss)? when
open positions are closed out. The sum of these amounts
constitutes the Partnership?s trading results. The market value
of a futures contract is the settlement price on the exchange on
which that futures contract is traded on a particular day. The
value of a foreign currency forward contract is based on the spot
rate as of the close of business. Interest income, as well as
management fees, incentive fees, and brokerage fees expenses of
the Partnership are recorded on an accrual basis.
<page> Demeter believes that, based on the nature of the
operations of the Partnership, no assumptions relating to the
application of critical accounting policies other than those
presently used could reasonably affect reported amounts.
For the Three and Six Months Ended June 30, 2009
The Partnership recorded total trading results including interest
income totaling $(10,445,856) and expenses totaling $10,444,027,
resulting in a net loss of $20,889,883 for the three months ended
June 30, 2009. The Partnership?s net asset value per Unit
decreased from $38.40 at March 31, 2009, to $36.81 at June 30,
2009.
The most significant trading losses of approximately 2.5% were
incurred in the global fixed-income sector during April from long
positions in U.S. and European fixed-income futures as prices
reversed lower after a pledge from G-20 leaders to support the
global economy sapped demand for the ?safe haven? of government
bonds. Additional losses were recorded in June from long
positions in short-term U.S. and European interest rate futures
as prices declined amid rising investor confidence. Meanwhile,
short positions in Japanese fixed-income futures resulted in
losses, primarily during June, as prices increased after the Bank
of Japan indicated that it remained cautious about the Japanese
economy. Within the global equity index sector, losses of
approximately 0.5% were recorded primarily during April from
<page> short futures positions in European equity index futures
as prices rose amid better-than-expected corporate earnings
reports and news that G-20 leaders pledged more than $1 trillion
in emergency aid to cushion the global economy from further
financial turmoil. Additional losses were experienced during
June from newly established long positions in European equity
index futures as prices reversed lower on speculation that the
recent rally in the global stock markets might have outpaced the
prospects for corporate earnings growth. Smaller losses of
approximately 0.1% were incurred within the metals complex
throughout a majority of the quarter from short futures positions
in aluminum as prices increased on sentiment that efforts by the
Chinese government to revive that nation?s economy might boost
demand for base metals. Additional losses were incurred from
long positions in gold futures as prices dropped in June due to a
rise in the value of the U.S. dollar, which eroded demand for
precious metals as an alternative investment. A portion of the
Partnership?s losses for the quarter was offset by gains of
approximately 0.3% in the currency sector, primarily during May,
from long positions in the South African rand, Australian dollar,
and New Zealand dollar versus the U.S. dollar as the value of the
U.S. dollar moved lower against most of its rivals after a
government report showed U.S. employers cut fewer jobs than
forecasted, which reduced demand for the U.S. dollar as a ?safe
haven? currency. Meanwhile, the value of the South African rand,
Australian dollar, and New Zealand dollar increased in the wake
<page> of rising commodity prices. Within the energy markets,
gains of approximately 0.3% were achieved primarily during May
from long futures positions in gasoline and crude oil as prices
rose on optimism that a possible rebound in global economic
growth might boost energy demand. Smaller gains of 0.1% were
experienced in the agricultural complex throughout a majority of
the quarter from long futures positions in the soybean complex as
prices moved higher on news of record imports in China, the
world?s largest purchaser. Elsewhere, short positions in lean
hog futures resulted in gains as prices fell in April and June on
speculation that demand for U.S. pork products might remain
sluggish amid ongoing swine flu concerns. Further gains in the
agricultural complex were recorded from long positions in sugar
futures as prices moved higher in May and June after the U.S.
Department of Agriculture said global output might fall more than
previously forecast.
The Partnership recorded total trading results including interest
income totaling $(32,330,257) and expenses totaling $22,857,573,
resulting in a net loss of $55,187,830 for the six months ended
June 30, 2009. The Partnership?s net asset value per Unit
decreased from $40.80 at December 31, 2008, to $36.81 at June 30,
2009.
The most significant trading losses of approximately 2.8% were
recorded in the global fixed-income sector during January, March,
<page> and April from long positions in U.S., European, and
Japanese fixed-income futures as prices dropped following news
that debt sales might increase as governments around the world
boosted spending in an effort to ease the deepening economic
slump. Additional losses were recorded in June from long
positions in short-term U.S. and European interest rate futures
as prices declined amid rising investor confidence due to better-
than-expected economic data. Meanwhile, newly established short
positions in Japanese fixed-income futures resulted in losses,
primarily during June, as prices increased after the Bank of
Japan indicated that it remained cautious about the Japanese
economy. Within the currency markets, losses of approximately
1.2% were incurred primarily during March from short positions in
the Swiss franc, euro, and Canadian dollar versus the U.S. dollar
as the value of the U.S. dollar decreased relative to most of its
rivals following the U.S. Federal Reserve?s surprise plans to
begin a more aggressive phase of quantitative easing and economic
stimulus spending. Additional losses were recorded during June
from long positions in Swiss franc, euro, and Canadian dollar
versus the U.S. dollar as the value of the U.S. dollar reversed
higher against these currencies amid speculation that the U.S.
Federal Reserve might raise interest rates following news that
U.S. payrolls fell less-than-expected in May. Elsewhere, losses
were recorded during January, February, and June from long
positions in the Japanese yen versus the U.S. dollar as the value
of the Japanese yen reversed lower against most of its rivals on
<page> speculation that the Bank of Japan might intervene to
weaken the currency, as well as on news that Japan?s trade
deficit substantially increased. Additional losses of
approximately 1.1% were experienced in the agricultural complex
primarily during March from short futures positions in the corn
and coffee as prices rose on speculation that government bailouts
might help revive the world economy and boost demand for these
commodities. During June, coffee futures prices fell amid
expectations of higher global output due to favorable weather
conditions in the world?s major growing regions, thus resulting
in losses from long positions. Elsewhere in the agricultural
complex, long positions in cocoa and wheat futures resulted in
losses as prices dropped during June amid speculation that
supplies might exceed demand due to the economic slowdown.
Within the metals complex, losses of approximately 0.7% were
experienced during late February, March, and June from long
positions in gold futures as prices fell amid a rebound in the
global equity markets and a rise in the value of the U.S. dollar,
which eroded demand for precious metals as an alternative
investment. Meanwhile, short futures positions in zinc and
aluminum resulted in further losses as prices reversed higher
during February, March, and June on speculation that economic
stimulus plans in the U.S. and China would help boost demand for
base metals. Smaller losses of approximately 0.7% were
experienced within the global equity index sector, primarily
during March and April, from short futures positions in U.S. and
<page> European equity index futures as prices rose amid better-
than-expected corporate earnings reports and news that G-20
leaders pledged more than $1 trillion in emergency aid to cushion
the global economy from further financial turmoil. Additional
losses were experienced during June from newly established long
positions in European equity index futures as prices reversed
lower on speculation that the recent rally in the global stock
markets might have outpaced the prospects for corporate earnings
growth. A portion of the Partnership?s losses for the first six
months of the year was offset by gains of approximately 0.4%
experienced within the energy markets throughout the first
quarter and April from short futures positions in natural gas as
prices moved lower amid speculation that the ongoing global
economic recession might continue to erode energy demand. Further
gains were achieved primarily during May from long futures
positions in gasoline as prices rose on optimism that a possible
rebound in global economic growth might boost energy demand.
For the Three and Six Months Ended June 30, 2008
The Partnership recorded total trading results including interest
income totaling $69,168,052 and expenses totaling $16,771,581,
resulting in net income of $52,396,471 for the three months ended
June 30, 2008. The Partnership?s net asset value per Unit
increased from $35.32 at March 31, 2008, to $38.63 at June 30,
2008.
<page> The most significant trading gains of approximately 9.7%
were experienced in the energy markets throughout the quarter
from long futures positions in crude oil and its related products
as prices moved higher due to supply threats in Nigeria and Iraq,
growing Asian fuel consumption, and concerns of a U.S. supply
shortage. Elsewhere, long positions in natural gas futures
resulted in gains as prices rose after U.S. inventories declined
to the lowest level since 2005 amid forecasts for warmer weather
throughout the United States. Furthermore, futures prices for
crude oil, its related products, and natural gas were also
pressured higher due to continued weakness in the U.S. dollar.
Additional gains of approximately 0.9% were recorded in the
global interest rate sector primarily during May and June from
short positions in European fixed-income futures as prices moved
lower due to reports of accelerating inflation in the Euro-Zone.
Gains of approximately 0.8% were also recorded in the global
stock index sector primarily during June from short positions in
European equity index futures as prices declined sharply on
concerns that record commodity prices and additional subprime-
related writedowns might erode corporate earnings and continue to
slow global economic growth. In addition, prices were pressured
lower after government reports revealed an unexpected drop in
Germany?s consumer confidence and a continued housing slump in
the United Kingdom. Smaller gains of approximately 0.6% were
experienced in the agricultural markets primarily during June
from long futures positions in corn and the soybean complex as
<page> prices moved higher on supply concerns after severe floods
in the U.S. Midwest damaged crops. In addition, corn futures
prices moved higher due to strong demand for ethanol. Elsewhere,
long positions in cocoa futures resulted in gains during June as
prices rose to the highest level since 1986 on fears that dry
weather would damage crops in the Ivory Coast, the world?s
largest producer. A portion of the Partnership?s gains for the
quarter was offset by losses of approximately 0.2% in the
currency sector primarily from long positions in the Swiss franc
and euro versus the U.S. dollar as the value of the U.S. dollar
strengthened against these currencies during April after the
release of stronger-than-expected U.S. economic reports.
Meanwhile, short positions in the Canadian dollar versus the U.S.
dollar resulted in losses primarily during April as the value of
the Canadian dollar moved higher against the U.S. dollar amid
rising energy prices.
The Partnership recorded total trading results including interest
income totaling $154,085,739 and expenses totaling $33,961,458,
resulting in net income of $120,124,281 for the six months ended
June 30, 2008. The Partnership?s net asset value per Unit
increased from $31.24 at December 31, 2007, to $38.63 at June 30,
2008.
The most significant trading gains of approximately 10.5% were
recorded in the energy sector primarily throughout a majority of
<page> the first six months of the year from long futures
positions in crude oil and its related products as prices moved
higher amid increasing global supply concerns and strong demand
in Asia. Elsewhere, long positions in natural gas futures
resulted in gains during April, May, and June as prices rose
after U.S. inventories declined to the lowest level since 2005.
Furthermore, futures prices for crude oil, its related products,
and natural gas were also pressured higher due to continued
weakness in the U.S. dollar. Additional gains of approximately
5.7% were experienced in the agricultural sector primarily during
January, February, and June from long positions in corn futures
as prices moved higher on supply concerns and rising demand for
alternative fuels made from crops. Meanwhile, long futures
positions in the soybean complex resulted in gains primarily
during June as prices increased after a government report showed
a rise in demand for U.S. supplies following labor disputes that
slowed exports from Argentina and Brazil. Elsewhere, gains were
experienced from long positions in cocoa futures primarily during
January, February, and June as prices moved higher amid supply
disruptions in the Ivory Coast, the world?s largest producer.
Gains of approximately 3.9% were also recorded within the global
interest rate sector primarily during January and February from
long positions in U.S. fixed-income futures as prices moved
higher amid a sharp decline in global equity markets and fears of
a recession in the United States. During May and June, gains
were recorded from short positions in European fixed-income
<page> futures as prices decreased after the European Central
Bank left its benchmark interest rate unchanged at 4.0% and
signaled it might raise borrowing costs in July in order to
combat accelerating inflation in the Euro-Zone. Within the
currency sector, gains of approximately 3.1% were recorded
primarily during February, March, and May from short positions in
the U.S. dollar versus the euro, Swiss franc, Brazilian real, and
Mexican peso as the value of the U.S. dollar weakened against
most of its major rivals after U.S. government reports showed a
rise in unemployment, weaker-than-expected U.S. retail sales, and
U.S. consumer confidence at a 16-year low. The value of the U.S.
dollar continued to fall in June after the U.S. Federal Reserve
held interest rates steady at 2.0%. Smaller gains of
approximately 2.5% were experienced in the global stock index
sector primarily during January, February, March, and June from
short positions in European and Pacific Rim equity index futures
as prices decreased on concerns that mounting losses linked to
U.S. sub-prime mortgage investments might continue to erode
corporate earnings and curb global economic growth. Lastly,
gains of approximately 1.9% were recorded in the metals markets
primarily during January and February from long positions in
gold, silver, and platinum futures as prices moved higher amid
continued uncertainty in the direction of the U.S. dollar and
further ?safe haven? buying because of weakness in global equity
markets. Elsewhere, long positions in tin futures experienced
gains primarily during February as prices moved higher on supply
<page> concerns and rising demand from China and India.
Meanwhile, short positions in nickel futures resulted in gains
during May as prices fell amid rising inventories.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards and options. The market-
sensitive instruments held by the Partnership are acquired for
speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is inherent to the primary business activity
of the Partnership.
The futures, forwards and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities, factors that result in frequent
changes in the fair value of the Partnership?s open positions,
and consequently in its earnings, whether realized or unrealized,
and cash flow. Gains and losses on open positions of exchange-
traded futures, exchange-traded forward, and exchange-traded
futures-styled options contracts are settled daily through
variation margin. Gains and losses on off-exchange-traded
forward currency contracts are settled upon termination of the
<page> contract. However, the Partnership is required to meet
margin requirements equal to the net unrealized loss on open
forward currency contracts in the Partnership accounts with the
counterparty, which is accomplished by daily maintenance of the
cash balance in a custody account held at MS&Co.
The Partnership?s total market risk may increase or decrease as
it is influenced by a wide variety of factors, including, but not
limited to, the diversification among the Partnership?s open
positions, the volatility present within the markets, and the
liquidity of the markets.
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership typically to be many times the total
capitalization of the Partnership.
The Partnership?s past performance is no guarantee of its future
results. Any attempt to numerically quantify the Partnership?s
market risk is limited by the uncertainty of its speculative
trading. The Partnership?s speculative trading and use of
leverage may cause future losses and volatility (i.e., ?risk of
ruin?) that far exceed the Partnership?s experiences to date
under the ?Partnership?s Value at Risk in Different Market <page>
Sectors? section and significantly exceed the Value at Risk
(?VaR?) tables disclosed.
Limited partners will not be liable for losses exceeding the
current net asset value of their investment.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partnership?s
market risk exposures contain ?forward-looking statements? within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions on the basis of mark
to market accounting principles. Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings and cash flow.
The Partnership?s risk exposure in the market sectors traded by
the Trading Advisors is estimated below in terms of VaR. The
Partnership estimates VaR using a model based upon historical
simulation (with a confidence level of 99%) which involves
constructing a distribution of hypothetical daily changes in the
<page> value of a trading portfolio. The VaR model takes into
account linear exposures to risk including equity and commodity
prices, interest rates, foreign exchange rates, and correlation
among these variables. The hypothetical changes in portfolio value
are based on daily percentage changes observed in key market
indices or other market factors (?market risk factors?) to which
the portfolio is sensitive. The one-day 99% confidence level of
the Partnership?s VaR corresponds to the negative change in
portfolio value that, based on observed market risk factors, would
have been exceeded once in 100 trading days, or one day in 100.
VaR typically does not represent the worst case outcome.
Demeter uses approximately four years of daily market data (1,000
observations) and re-values its portfolio (using delta-gamma
approximations) for each of the historical market moves that
occurred over this time period. This generates a probability
distribution of daily ?simulated profit and loss? outcomes. The
VaR is the appropriate percentile of this distribution. For
example, the 99% one-day VaR would represent the 10th worst
outcome from Demeter?s simulated profit and loss series.
The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-exchange
dealer-based instruments. They are also not based on exchange
and/or dealer-based maintenance margin requirements.
<page> VaR models, including the Partnership?s, are continually
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Advisors in their daily risk management
activities. Please further note that VaR as described above may
not be comparable to similarly-titled measures used by other
entities.
The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total Net Assets
by primary market risk category at June 30, 2009 and 2008. At
June 30, 2009 and 2008, the Partnership?s total capitalization
was approximately $476 million and $601 million, respectively.
Primary Market June 30, 2009 June 30, 2008
Risk Category Value at Risk Value at Risk
Equity (0.81)% (0.59)%
Currency (0.56) (0.76)
Interest Rate (0.25) (0.39)
Commodity (0.94) (1.69)
Aggregate Value at Risk (1.95)% (1.94)%
The VaR for a market category represents the one-day downside
risk for the aggregate exposures associated with this market
category. The Aggregate Value at Risk listed above represents
<page> the VaR of the Partnership?s open positions across all the
market categories, and is less than the sum of the VaRs for all
such market categories due to the diversification benefit across
asset classes.
Because the business of the Partnership is the speculative
trading of futures, forwards and options, the composition of its
trading portfolio can change significantly over any given time
period, or even within a single trading day. Such changes could
positively or negatively materially impact market risk as
measured by VaR.
The table below supplements the quarter-end VaR set forth above
by presenting the Partnership?s high, low, and average VaR, as a
percentage of total Net Assets for the four quarter-end reporting
periods from July 1, 2008, through June 30, 2009.
Primary Market Risk Category High Low Average
Equity (0.81)% (0.03)% (0.41)%
Currency (0.76) (0.10) (0.41)
Interest Rate (0.71) (0.25) (0.44)
Commodity (1.69) (0.27) (0.80)
Aggregate Value at Risk (1.95)% (0.57)% (1.31)%
Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio?s aggregate market
risk exposure, incorporating a range of varied market risks,
reflect risk reduction due to portfolio diversification or hedging
<page> activities, and can cover a wide range of portfolio assets.
However, VaR risk measures should be viewed in light of the
methodology?s limitations, which include, but may not be limited
to the following:
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past market fluctuations applied to
current trading positions while future risk depends on future
positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.
In addition, the VaR tables above, as well as the past performance
of the Partnership, give no indication of the Partnership?s
potential ?risk of ruin?.
The VaR tables provided present the results of the Partnership?s
VaR for each of the Partnership?s market risk exposures and on an
aggregate basis at June 30, 2009 and 2008, and for the four
quarter-end reporting periods from July 1, 2008 through June 30,
<page> 2009. VaR is not necessarily representative of the
Partnership?s historic risk, nor should it be used to predict the
Partnership?s future financial performance or its ability to
manage or monitor risk. There can be no assurance that the
Partnership?s actual losses on a particular day will not exceed
the VaR amounts indicated above or that such losses will not occur
more than once in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances. These balances and any market risk they may represent
are immaterial.
The Partnership also maintains a substantial portion of its
available assets in cash at MS&Co.; as of June 30, 2009, such
amount was equal to approximately 94% of the Partnership?s net
asset value. A decline in short-term interest rates would result
in a decline in the Partnership?s cash management income. This
cash flow risk is not considered to be material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality, and multiplier features of the Partnership?s market-
sensitive instruments, in relation to the Partnership?s Net
Assets.
<page>
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures - constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures, as well as the
strategies used and to be used by Demeter and the Trading Advisors
for managing such exposures, are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership?s risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation, and many other
factors could result in material losses, as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership.
The Trading Advisors, in general, tend to utilize their trading
system(s) to take positions when market opportunities develop, and
Demeter anticipates that the Trading Advisors will continue to do
so.
<page> Investors must be prepared to lose all or substantially all
of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership at June 30, 2009, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.
Equity. The second largest market exposure of the Partnership at
June 30, 2009, was to the global stock index sector, primarily to
equity price risk in the G-7 countries. The G-7 countries consist
of France, the U.S., the United Kingdom, Germany, Japan, Italy,
and Canada. The stock index futures traded by the Partnership are
by law limited to futures on broadly-based indices. The
Partnership?s primary market exposures were to the Nikkei 225
(Japan), IBEX 35 (Spain), S&P 500 (U.S.), TOPIX (Japan), NASDAQ
100 (U.S.), Euro Stox 50 (Europe), Hang Seng (Hong Kong), DAX
(Germany), CAC 40 (France), S&P/MIB (Italy), H-Shares (Hong
Kong), FTSE 100 (United Kingdom), Dow Jones (U.S.), OMX 30
(Sweden), and SPI 200 (Australia) stock indices. The Partnership
is typically exposed to the risk of adverse price trends or
static markets in the European, U.S., Asian, South African, and
Australian stock indices. Static markets would not cause major
market changes, but would make it difficult for the Partnership
to avoid trendless price movements, resulting in numerous small
losses.
<page>
Currency. At June 30, 2009, the Partnership had market exposure
to the currency sector. The Partnership?s currency market
exposure was to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes, as well as political and general economic conditions
influence these fluctuations. The Partnership trades a large
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. At June 30,
2009, the Partnership?s major exposures were to the euro,
Japanese yen, British pound, Australian dollar, Canadian dollar,
Swiss franc, New Zealand dollar, and Norwegian krone currency
crosses, as well as to outright U.S. dollar positions. Outright
positions consist of the U.S. dollar vs. other currencies. These
other currencies include major and minor currencies. Demeter
does not anticipate that the risk associated with the
Partnership?s currency trades will change significantly in the
future.
Interest Rate. At June 30, 2009, the Partnership had market
exposure to the global interest rate sector. Exposure was
primarily spread across the European, Japanese, U.S., Australian,
and Canadian interest rate sectors. Interest rate movements
directly affect the price of the sovereign bond futures positions
held by the Partnership and indirectly affect the value of its
stock index and currency positions. Interest rate movements in
<page> one country, as well as relative interest rate movements
between countries, materially impact the Partnership?s
profitability. The Partnership?s interest rate exposure is
generally to interest rate fluctuations in the U.S. and the other
G-7 countries? interest rates. However, the Partnership also
takes futures positions in the government debt of smaller
countries ? e.g., Australia. Demeter anticipates that the G-7
countries? interest rates and Australian interest rates will
remain the primary interest rate exposure of the Partnership for
the foreseeable future. The speculative futures positions held
by the Partnership may range from short to long-term instruments.
Consequently, changes in short, medium, or long-term interest
rates may have an effect on the Partnership.
Commodity.
Energy. The largest market exposure of the Partnership at
June 30, 2009, was to the energy sector. The Partnership?s
energy exposure was shared primarily by futures contracts in
crude oil and its related products, as well as in natural
gas. Price movements in these markets result from
geopolitical developments, particularly in the Middle East,
as well as weather patterns, and other economic
fundamentals. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in the future. Natural gas has exhibited
volatility in prices resulting from weather patterns and
<page> supply and demand factors and will likely continue in
this choppy pattern.
Soft Commodities and Agriculturals. The third largest
market exposure of the Partnership at June 30, 2009, was to
the markets that comprise these sectors. Most of the
exposure was to the sugar, wheat, soybean meal, corn,
soybean oil, cocoa, lean hogs, coffee, live cattle, feeder
cattle, soybeans, orange juice, rubber, and cotton markets.
Supply and demand inequalities, severe weather disruptions,
and market expectations affect price movements in these
markets.
Metals. At June 30, 2009, the Partnership had market
exposure to the metals sector. The Partnership's metals
exposure was to fluctuations in the price of base metals,
such as copper, nickel, aluminum, zinc, lead, and tin, as
well as precious metals, such as silver, gold, and
palladium. Economic forces, supply and demand inequalities,
geopolitical factors, and market expectations influence
price movements in these markets.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at June 30, 2009:
<page> Foreign Currency Balances. The Partnership?s primary
foreign currency balances at June 30, 2009, were in euros,
Australian dollars, Japanese yen, British pounds, South
African rands, Hong Kong dollars, Swedish kronor, Czech
koruny, New Zealand dollars, Canadian dollars, Hungarian
forint, Singapore dollars, Swiss francs, and Norwegian
kroner. The Partnership controls the non-trading risk of
foreign currency balances by regularly converting them back
into U.S. dollars upon liquidation of their respective
positions.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to
manage the risk of the Partnership?s open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership?s assets
among different market sectors and trading approaches through the
selection of Commodity Trading Advisors and by daily monitoring
their performance. In addition, the Trading Advisors establish
diversification guidelines, often set in terms of the maximum
margin to be committed to positions in any one market sector or
market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership?s non-
trading instrument, cash. Cash is the only Partnership investment
directed by Demeter, rather than the Trading Advisors.
<page>
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report,
the President and Chief Financial Officer of Demeter, the
general partner of the Partnership, have evaluated the
effectiveness of the Partnership?s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act), and have judged such controls and procedures to
be effective.
Changes in Internal Control over Financial Reporting
There have been no material changes during the period covered by
this quarterly report in the Partnership?s internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
of the Exchange Act) or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
Limitations on the Effectiveness of Controls
Any control system, no matter how well designed and operated, can
provide reasonable (not absolute) assurance that its objectives
will be met. Furthermore, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, have been detected.
Item 4T. CONTROLS AND PROCEDURES
Not applicable.
<page> PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
There have been no material changes from the risk factors
previously referenced in the Partnership?s Report on Form 10-K for
the fiscal year ended December 31, 2008, and the Partnership?s
Report on Form 10Q for the quarter ended March 31, 2009.
Item 6. EXHIBITS
31.01 Certification of President of Demeter Management LLC, the
general partner of the Partnership, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.02 Certification of Chief Financial Officer of Demeter
Management LLC, the general partner of the Partnership,
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.01 Certification of President of Demeter Management LLC, the
general partner of the Partnership, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management LLC, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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<page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Morgan Stanley Spectrum Select L.P.
(Registrant)
By: Demeter Management LLC
(General Partner)
August 12, 2009 By:/s/ Christian Angstadt
Christian Angstadt
Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Regisrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
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